India’s central bank approves highest-ever dividend to the government

[Pelican Press 0]

India’s central bank approves highest-ever dividend to the government

A youth walks past the entrance of the Reserve Bank of India head office in Mumbai on Nov. 17, 2021. India’s central bank raised its main lending rate off record lows in a surprise move on Wednesday to contain rising inflation, shocking markets and pushing the benchmark 10-year bond yield to its highest levels in three years.

Punit Paranjpe | Afp | Getty Images

The board of India’s central bank approved a record surplus transfer of 2.11 trillion rupees ($25.3 billion) to the government for the fiscal year that ended in March, sharply above analysts’ and government projections.

The government had budgeted a dividend of 1.02 trillion rupees from the Reserve Bank of India, state-run banks and other financial institutions, interim budget estimates for the fiscal year 2024/25 show.

For FY23, the RBI transferred 874.16 billion rupees to the government.

Higher interest rates on both domestic and foreign securities, significantly higher ****** ***** of foreign exchange and little impact from the central bank’s liquidity operations possibly lead to such a “whopping dividend”, said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.

“We expect such a windfall to help fiscal deficit ease by 0.4% in FY25. Scope for lower borrowing being announced in the upcoming budget will now provide significant respite to the bond markets,” she added.

India’s benchmark 10-year bond yield dropped five basis points to 6.99% after the announcement, its lowest level in nearly a year.

The bank’s board reviewed the global and domestic economic scenario, including risks to the

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, the statement added.

The RBI board also decided to raise the contingency risk buffer (CRB) to 6.5% from 6% previously as the economy ******** robust and resilient, it said.

“The higher dividend represents additional fiscal revenue of 0.4% of GDP,” Gaura Sen Gupta, an economist with IDFC First Bank, wrote in emailed comments.

“Incorporating potential shortfall in disinvestment receipts and more moderate tax collection growth than budgeted, FY25 fiscal deficit could undershoot budget estimate by 0.2% of GDP” Sen Gupta wrote.

Analysts had expected a surplus transfer in the range of 750 billion rupees to 1.2 trillion rupees.

“This gives the government significant elbow room to manage any ******** spending and sustain capex spending even if the disinvestment receipts fall short,” said Garima Kapoor, an economist and senior vice president at Elara Capital.

Rating agency ICRA’s economist Aditi Nayar said increasing the funds available for capex would boost the quality of fiscal deficit but additional spending may be difficult to incur within the eight-odd months left in the fiscal year after the final budget is presented.

India is currently in the midst of a marathon election which is set to conclude on June 1 with counting on June 4. The date for the budget will only be announced at a later point after a government is formed.

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